Accounting 9706/32 May/June 2022: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, May/June 2022. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Read Source A1 in the insert.
(a) State two reasons why a club needs to have a clear objective.
1 ……
2 ……
[2]
(b) Explain how the tuition fees of $8000 should be treated in the revised financial statements of
MN Drama Club. Support your answer with reference to the relevant accounting concept.
…… [4]
(c) Prepare the revised income and expenditure account for the year ended 31 December 2021.
…… [12]
Additional information
The chairman has received many requests from local parents for the tutorial classes because the fee charged by the club is 50% lower than other organisations. He has a plan to admit 60 students in October 2022. To increase the capacity, he estimates that an expenditure of $30 000 would be incurred in an extension of the club’s building.
(d) Advise the chairman whether or not he should carry out the plan. Justify your answer.
…… [7]
[Total: 25]
Mark scheme
1(a) Helps the club to ensure that it has appropriate plans / strategies (1) 2
Provides clarity to potential members as to the purpose of the club (1)
Accept other valid responses.
1(b) This is an application of the accrual / matching concept. (1) 4
3-month’s tuition of $3000 covering October to December 2021 is recognised in the income and expenditure account for
the year ended 31 December 2021 (1)
The remaining $5000 is shown under the current liability section of the statement of financial position at 31 December
2021 (1) because this is deferred income / refundable (1)
1(c) Income and expenditure account for the year ended 31 December 2021 12
$ $
Subscription fee W1 49 100 (4)
Tuition fees W2 3 000 (1)
Profit from performances W3 2 700 (1)
54 800
Administrative expenses W4 32 900 (1)
Heating and lighting W5 11 000 (1)
Building maintenance 4 600
Depreciation – Building W6 21 600 (1)
Depreciation – Equipment W7 8 200 (2)
78 300
Surplus/Deficit (23 500) (1)OF
W1 $40 400 + $2700(1) + $7200(1) – $1200 (1) = $49 100 (1)OF
W2 ($8000 × 3/8) = $3000(1)
W3 ($14 200 – $11 500) = $2700 (1)
W4 ($30 100 – $6200 + $9000) = $32 900(1)
W5 ($13 200 – $700 – $1500)= $11 000(1)
W6 ($200 000 + $16 000) × 10% = $21600(1)
W7 ($120 000 + $6000 (1) – $85 000) × 20% = $8200 (1)
1(d) For (Max 3) 7
The club can earn more income – students’ fees (1)
Available space of building can be utilised at other times (1)
Student members can later become ordinary members and this will increase revenue in the future (1)
Students from poor families can afford the tuition fee (1)
The image of the club can be promoted (1)
Against (Max 3)
The plan may not meet the existing objective of the club (1)
The club may be in a financially risky position as its bank balance is low. (1)
The club will have to raise extra funds for the expansion. (1)
There may not be enough qualified volunteers to carry out the work. (1)
The other providers might improve their offerings. (1)
1 mark for decision
Accept other valid answers.
Read Source A2 in the insert.
(a) Prepare a statement to show the ‘profit for the year’ for the year ended 31 December 2021.
…… [8]
(b) Explain the accounting treatment of the following, with reference to the relevant international accounting standards (IAS):
(i) item 3
…… [3]
(ii) item 4.
…… [3]
Additional information
Equity of AB plc at 31 December 2020 was as follows:
$
Ordinary share capital ($1 shares) 500 000
Share premium 86 000
Revaluation reserve 72 000
Retained earnings 192 000
850 000
During the year ended 31 December 2021, the following transactions took place.
1 On 1 February, the final dividend of $0.08 per share was paid from the 2020 profit.
2 On 5 March, a bonus issue of one ordinary share for every ten ordinary shares held was made. It is the policy of the company to keep its reserves in the most flexible form.
3 On 1 June, 100 000 new ordinary shares were offered to the public at $1.80 each. AB plc received subscriptions for 80 000 shares which were fully paid.
4 On 1 September, an interim dividend of $0.02 per share was paid on all shares held at
31 March 2021.
5 On 31 December, a final dividend of $0.09 per share was proposed on all shares held at
31 December 2021.
(c) State one difference between a rights issue and a bonus issue of shares.
…… [2]
(d) Prepare the statement of changes in equity for the year ended 31 December 2021. A total column is not required.
…… [9]
[Total: 25]
Mark scheme
2(a) $ 8
Profit from operations 98 000 (1)
Debenture interest W1 (4 000) (1)
Depreciation on property overcharged W2 2 750 (2)
Depreciation on non-current asset overcharged 14 000 (1)
Inventory overvalued W3 (1 100) (2)
Profit for the year 109 650 (1)OF
W1
$200 000 × 6% × 4/12 = $4000(1)
W2
Depreciation based on $432 000 $432 000 × 1/36 = $12 000(1)
Depreciation based on $296 000 $296 000 × 1/32 = ($9250) (1)
$12 000 – $9250 = $2750
W3
Cost $28 000 × 100/160 = ($17 500)(1)
Net realisable value $28 000 × 80% – $6000 = $16 400(1)
$16 400 – $17 500 = ($1100)
2(b)(i) Item 3 3
IAS 8 Accounting policies, changes in accounting estimates and errors (1)
$20 000 is adjusted against the retained earnings at 1 January 2021 (error of prior period) (1) and $14 000 is adjusted
against the current year (2021) profit from operations (1)
2(b)(ii) Item 4 3
IAS 2 Inventories (1)
Inventory is valued at the lower of cost and net realisable value (1)
The net realisable value [$16 400] is therefore the valuation. (1)
Accept OF comments
2(c) Bonus issue involves the use of reserves (1) whereas a rights issue results in the company receiving cash. (1) 2
2(d) Share Share Revaluation Retained 9
capital premium reserve earnings
$ $ $ $
At 1 January 2021 500 000 86 000 72 000 212 000 (1) W1
2020 final dividend paid (40 000) (1) W2
Bonus issue 50 000 (50 000) (1)row
New issue 80 000 64 000 (1)row
Interim dividend (11 000) (1) W3
Profit for the year 109 650 (1)OF
Revaluation loss (72 000) (1) (16 000) (1)
At 31 December 2021 630 000 100 000 0 254 650 (1)OF
W1 $192 000 + $20 000 = $212 000
W2 500 000 × $0.08 = $40 000
W3 (500 000 + 50000) × $0.02=$11 000
Read Source A3 in the insert.
(a) Explain two ways in which accounting ratios may be used by potential investors to assess the performance of a business.
1 ……
2 ……
[4]
(b) Calculate to two decimal places the following:
(i) price earnings ratio
…… [2]
(ii) dividend yield
…… [2]
(iii) income gearing
…… [2]
(iv) gearing ratio
…… [4]
(v) return on capital employed.
…… [2]
Additional information
The directors are considering declaring a proposed dividend of $0.20 per ordinary share. Due to the low level of retained earnings at 31 December 2021, they ask the accountant whether the dividend can also be paid out of other reserves.
(c) Discuss how the accountant should reply to the directors.
…… [4]
Additional information
The directors are thinking of investing $100 000 in a new project in 2022. The project will generate a profit of $24 000 before interest in 2022. They have two options to raise $100 000:
option 1: issue of new ordinary shares
option 2: issue of a further 8% debenture.
(d) Advise the directors which option they should choose. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
3(a) Comparison of performance with another company (1) in the same trade in the same year. (1) 4
Comparison of performance with previous years (1) of the same business. (1)
To make a decision (1) on whether to buy the shares. (1)
Max 2 points × 2 marks (1 mark for each identification plus 1 further mark for explanation.)
Accept other valid answers.
3(b)(i) Earnings per share $114 000 / 600 000=$0.19 (1) 2
Price earnings ratio $2.4/$0.19 = 12.63 (1)OF
3(b)(ii) Dividend per share $90 000/600 000 = $0.15 (1) 2
Dividend yield ($0.15/$2.4) × 100 = 6.25%(1)OF
3(b)(iii) Debenture interest $150 000 × 8%=$12 000 (1) 2
Income gearing ($12 000/$126 000 OF) × 100 = 9.52% (1)OF
3(b)(iv) $ 4
Ordinary share capital 600 000
Retained earnings ($38 000 + $114 000-$90 000) 62 000
General reserve 75 000
Revaluation reserve 80 000
Equity at 31 December 2021 817 000 (1)
Gearing ratio
$150 000 (1)/($150 000 + $817 000) (1)OF × 100 = 15.51%(1)OF
3(b)(v) Return on capital employed 2
$126 000 (1) / $967 000 × 100 = 13.03% (1)OF
3(c) The dividend can be paid from the general reserve (1) as profits are realised. (1) 4
The dividend may not be paid from the revaluation reserve (1) as these profits are not realised. (1)
Profits are treated as realised only when realised in the form of cash or other assets. (1)
Max 4
3(d) Debenture increases the gearing ratio / gearing ratio is still very low (1) 5
Debenture increases the interest expenses and reduces profit (1)
Debenture has to be repaid / share capital is fixed capital (1)
Debentures may need security (1)
Share dividends are discretionary / debenture interest must be paid (1)
The control of existing shareholders may be diluted (1)
The project yields a return of 24% ($24 000/100 000) which is higher than the 8% interest, the shareholders will benefit. (1)
1 mark for decision.
Accept other valid answers.
Read Source A4 in the insert.
(a) Prepare a statement showing the partners’ share of profit or loss on realisation.
…… [6]
(b) Prepare the partners’ capital accounts in columnar form to show the closing entries.
…… [5]
(c) Prepare the journal entries in MM Limited’s books to record the acquisition of the partnership business.
…… [3]
(d) Define the term ‘intangible asset’.
…… [2]
(e) Discuss the reasons why the purchase consideration was more than $730 000.
…… [6]
(f) Advise the directors whether or not they should have paid more than $730 000 for the partnership. Justify your answer.
…… [3]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) 6
$
Total consideration 770 000 (1)
Motor vehicle-Alan 18 000 (1)
Trade payables discount 1 000 (1)
789000
Non-current assets (565 000) (1)
Inventory (75 000) }
Trade receivables (93 000) }(1)
Profit on realisation 56 000
Alan $56 000 × 3/5 33 600
Bobby $56 000 × 2/5 22 400 (1)OF
4(b) Capital account 5
Alan Bobby Alan Bobby
$ $ $ $
Current account 6 000 * Balance b/d 400 000 320 000
Motor vehicle 18 000 (1) Current account 25 000 *(1)
MM Limited 385 000 } 385 000 }(1) Profit on realisation 33 600 22 400 (1)OF
Bank 24 600 Bank 17 600 (1)OF
433 600 385 000 433 600 385 000
4(c) Dr Cr 3
$ $
Land and buildings 410 000 }
Equipment 132 000 }
Motor vehicles 30 000 }
Inventory 70 000 }
Trade receivables 88 000 }
Goodwill 40 000 } (1)
Ordinary share capital 550 000 (1)
Share premium 220 000 (1)
_______ _______
770 000 770 000
4(d) An intangible asset is an identifiable non-monetary asset (1) without physical substance (1) 2
4(e) MM Limited pays $40 000 above the total value of tangible assets acquired as purchased goodwill. (1) 6
Purchase goodwill is the excess of consideration over the fair value of net assets acquired. (1)
Goodwill will bring future economic benefit to MM Limited. (1)
Goodwill is created overtime through good reputation (1) because of high quality product (1), location (1), good
relationship with customers/loyal customer (1), and a team of competent and efficient staff (1)
Accept other valid answers.
Max 6
4(f) For 3
The company will receive future benefits in excess of $40 000 paid (1)
Against
It is difficult to accurately value the goodwill (1)
1 mark for decision
Accept other valid answers.
Read Source B1 in the insert.
(a) Explain one purpose of preparing a cash budget.
…… [2]
(b) Prepare the cash budget for each of the three months ending 31 August 2022.
…… [11]
(c) Prepare the budgeted income statement for the three month period ending 31 August 2022.
…… [5]
Additional information
The directors suggest a new credit policy to improve the cash position of the company for the three months ending 31 August 2022. A 3% cash discount is to be allowed to customers who pay one month after sales. It is estimated that 50% of the customers will take the cash discount. This new credit policy would apply to all sales made in May and thereafter.
(d) Calculate the effect of the new credit policy on the company’s cash receipts for each of the three months ending 31 August 2022.
…… [5]
(e) Comment on the effect of the new credit policy on the company’s profitability for the three month period ending 31 August 2022. Support your answer with calculations.
…… [2]
[Total: 25]
Mark scheme
5(a) To identify short/long term cash needs because of a cash deficit (1) so that management can take action to avoid the 2
problems by raising finance (1)
or
If there is a short/long term cash surplus (1) management can plan to utilise cash surplus to make investment or make
prompt payment to supplier to enjoy cash discount (1)
1 mark for basic statement + 1 mark for development
5(b) June July August 11
$ $ $
Opening balance 33 000 63 856 24 280
Receipts from customers 234 000 210 000 195 000 (1) row
Payments to suppliers
Current month purchases W1 81 144 (1) 89 376 (1) 84 672 (1)
Last month purchases W2 52 000 (1) 55 200 (1) 60 800 (1)
Wages 50 000 55 000 55 000 (1) row
Overheads 20 000 20 000 20 000 (1) row
Rent 30 000 (1)
203 144 249 576 220 472
Closing balance 63 856 24 280 ( 1 192) (1)OF
W1 $207 000 × (100/150) × 60% × 98% = $81 144, $228 000 × (100/150) × 60% × 98% = $89 376,
$216 000 × (100/150) × 60% × 98% = $84 672
W2 $195 000 x (100/150) × 40% = $52 000, $207 000 × (100/150) × 40% = $55 200, $228 000 × (100/150) × 40% =
$60 800
5(c) Budgeted income statement for 3 months ending on 31 August 2022 5
$ $
Sales 630 000
Cost of sales 420 000
Gross profit 210 000 (1)
Discount received W1 5 208 (1)
Wages 160 000 }
Overheads 60 000 }(1)
Rent 15 000 (1)
235 000
Net loss for the period (19 792) (1)OF
W1 ($207 000+$228 000+$216 000)x(100/150)x60%x2%=$5 208
5(d) June July August 5
$ $ $
April sales 234 000
May sales 101 850 105 000
June sales 94 575 97 500
July sales 100 395
Total receipts under new policy 335 850 (1) 199 575 (1) 197 895 (1)
Receipts before new policy 234 000 210 000 195 000 (1)OF row
Net increase in cash inflows 101 850 (10 425) 2 895 (1)OF row
5(e) Discount allowed for the new policy = [($210 000 + $195 000 + $207 000) ÷ 2] × 3%)= $9 180 (1). 2
Discount allowed / reduction of profit (1) by $9 180
Read Source B2 in the insert.
(a) Calculate the net cash flows for each year throughout the life of the machine.
…… [4]
Additional information
The cost of capital is 10%. Relevant discount factors are:
10% 16%
Year 1 0.909 0.862
Year 2 0.826 0.743
Year 3 0.751 0.641
Year 4 0.683 0.552
(b) Calculate for the proposed purchase:
(i) the net present value (NPV)
…… [4]
(ii) the internal rate of return (IRR).
…… [4]
(c) Advise the directors whether or not the machine should be purchased. Justify your answer.
…… [3]
Additional information
The directors decide that the NPV method should be adopted. One of the directors has concerns about the total sales target. To achieve the total sales of 25 200 units, he has the following suggestion.
1 The selling price should be reduced by $1.
2 Advertising costs of $8000 should be incurred in both Year 1 and Year 3.
3 The units produced and sold for each year should be the same. This would also keep the fixed cost to its minimum.
(d) Explain what is meant by the term ‘sensitivity analysis’ for investment appraisal.
…… [3]
(e) Assess the impact of the director’s suggestion on the decision to buy the new machine.
Support your answer with calculations.
…… [7]
[Total: 25]
Mark scheme
6(a) Variable Fixed 4
Sales cost cost Net
$ $ $ $
Year 0 (160 000)
Year 1 140 000 50 000 50 000 40 000 (1)
Year 2 210 000 75 000 60 000 75 000 (1)
Year 3 238 000 85 000 70 000 83 000 (1)
Year 4 117 600 42 000 50 000 25 600 (1)
6(b)(i) Net cash 4
flows
$ 10% PV
Year 0 (160 000) 1 (160 000) (1)
Year 1 40 000 0.909 36 360 }
Year 2 75 000 0.826 61 950 }(1)OF
Year 3 83 000 0.751 62 333 }
Year 4 25 600 0.683 17 485 }(1)OF
Net present value 18 128 (1)OF
6(b)(ii) Net cash 4
flows
$ 16% PV
Year 0 (160 000) 1 (160 000)
Year 1 40 000 0.862 34 480
Year 2 75 000 0.743 55 725
Year 3 83 000 0.641 53 203
Year 4 25 600 0.552 14 131
(2 461)
10% + (6% (1) × $18 128 (1OF)) / ($18 128 + $2 461 (1OF)) = 15.28% (1OF)
6(c) The net present value is positive (1) 3
The IRR is higher than the cost of capital (1)
Max 2 for comments
1 mark for decision
Accept OF comments
6(d) Investment appraisal is based on the assumptions used to forecast, i.e. sales volume, selling price and cost. (1) 3
These assumptions are subject to uncertainty and risk. (1)
Sensitivity analysis is a ‘what if’ analysis, calculating the effects of changes in these assumptions. (1)
6(e) Units produced and sold each year 25 200/4=6 300 units (1) 7
EITHER
($27-$10) × 6 300=$107 100 (1)
$107 100 – $50 000=57 100(1)
(0.909 + 0.826 + 0.751 + 0.683) = 3.169
NPV $57 100 × 3.169 – ($8 000 × 0.909)(1) – ($8 000 × 0.751)(1) – $160 000 = $7 670(1)OF
OR
Net cash
flows
$ 10% PV
Year 0 (160 000) 1 (160 000)
Year 1 49 100 0.909 44 632 (1)
Year 2 57 100 0.826 47 165 (1)
Year 3 49 100 0.751 36 874 (1)
Year 4 57 100 0.683 38 999 (1)
7 670 (1)OF
The director’s suggestion also gives positive NPV. There is no impact on the decision to buy the machine. (1)
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Accounting 9706/32 for May/June 2022 is out of 150 marks, with 3 hours to answer it, across 6 questions.
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